new start Press Reboot on Switch to Green Energy

Germany's next government must set priorities for its climate objectives or risk seeing society's support fall for the transition to green energy, writes an economist.
Let's dig a new pathway for the transition to green energy.

An expert commission's assessment of progress in Germany's transition to green energy, as presented in a government report, didn't pull any punches.

The experts say Germany will only partially meet goals to develop renewable energy. Other than that, the four experts expect delays, especially on ambitious plans to reduce greenhouse emissions and increase the economy’s energy efficiency.

So apart from expanding renewable energy, there's a considerable gap between the government's climate policy claims and reality.

The discrepancy between the likely success in expanding renewable energy and failure in all other energy policy goals reflects an imbalance in the instruments used to implement energy policy.

The German law governing the growth of renewable energy technology (EEG) refinances investment in the sector through levies on electricity consumers. It would be possible to finance the development of grid infrastructure - which is needed to accommodate a power supply increasingly dependent on renewables - and switching off of older coal-fired power stations on a similar basis.

But beyond the electricity sector, we don't have an integrated incentive and refinancing mechanism. Less money is available for energy-efficient buildings, e-car premiums or the development of recharging infrastructure. While these all receive government money, it's often tied to rigid, political restrictions on regulatory intervention.

There's plenty of support to meet energy regulations for new buildings, for example, but politicians shy away from existing real estate.

Germany has no coherent master plan to achieve the objectives of its energy transition. And the formula that has worked so well in the electricity sector is coming under pressure. There is growing resistance to the EEG from all directions.

A further problem is the steadily growing share of government-imposed taxes and levies in consumer electricity prices, which undermines the electricity's competitiveness as a future energy source. It also removes any economic incentive for the flexibility the system needs, because the purchase of electricity, even at the low wholesale prices made possible by renewable energy, is still unprofitable because of taxes.

An energy strategy with a long-term supply-side focus on energy sources like the wind and the sun will have to address this contradiction. Otherwise it will be impossible to integrate the growing and volatile quantities of renewable energy into the German and European energy supply system.

German energy policy faces two fundamental challenges in the coming legislature period. First, it has to find a sustainable way to achieve its ambitious objectives for greenhouse gas reduction that is both compatible with E.U. guidelines and politically feasible – or, failing that, it must revise its goals. Second, it has to fundamentally reform the German electricity market, including the EEG and electricity tax.

The government must also address the problems of electricity bottlenecks within Germany. The grid lacks the capacity to bring power generated in the windy north of the country to industrial centers in the south, which results in expensive "redispatch" costs. It also creates uncertainty over the security of supply in southern Germany, with knock-on effects in bordering countries.

These problems will get worse when further nuclear power units are switched off in 2017 and 2019.

There is no shortage of reform proposals for the government. Monitoring experts, for example, recommend a fundamental change of strategy in greenhouse gas reduction policy. They propose a fixed price for carbon emissions across all sectors, which would level the playing field by focusing on demand, rather than supply.

This sound idea implies revising the entire energy tax and emissions system, a Herculean task from a political point of view, given the associated questions of definition and the enormous distributional effects.

In its report, the expert commission also reminded everyone of a fairly obvious solution - buying up European emission certificates and decommissioning them. That would be a cost-efficient reduction measure, given the certificates' exceptionally low price right now. However, this would mean revising Germany's targets to take into account additional reductions achieved on a European level and setting these off against Germany's national targets.

Other proposals to accelerate greenhouse gas reduction continue to focus on the supply side, and, above all on selective regulatory law. One example is a mandatory phase out of fossil fuels in electricity supply. But without decommissioning European emission certificates, this would only lead to greenhouse gas reduction in Germany, while emissions rise in other parts of Europe.

It's a similar situation regarding the proposal to introduce a minimum price for CO2 in Germany, in those sectors already affected by European emissions trading. This would only be effective if it applied to the whole of Europe but would not currently get majority backing in the European Council.

There are also many proposals to reform the electricity market. Many refer to the EEG, beginning with calls to wind down the instrument altogether, from calls for detailed discussion of support schemes, right up to ideas for new ways to refinance commitments made to renewable energy investors.

Indeed, there are already several ideas to reform the system of levies and the period they cover, such as broadening of the levy basis to include oil and gas consumers, or covering the cost of the EEG from general taxation. Obviously, these ideas are politically sensitive.

There are also calls for changes to the system of network charges, which are added to consumer electricity bills and are being pushed up by congestion in the grid. And finally there is the unresolved and multifaceted discussion about introducing so-called capacity markets in Germany and Europe.

Against the background of these heterogenous interests, it would seem a good idea to use the new legislature period to first get an overall picture of the “energy transition” project. The starting point would have to be an update and expansion of the government's objectives, which were last formulated in 2010 and 2011.

From there, we as a society could have a transparent, informed and broad discussion about the different ways we might really achieve Germany's goals, and about their possible consequences for different sectors of society.

And the whole process of setting targets in the first place should also be reexamined and rearranged. How can a coherent energy policy work if even the formulation of its objectives leads to a point where E.U. guidelines and German definitions don't match up?

What's required is a coherent concept for the energy transition, with its objectives matching the instruments to implement them. We need to agree on the burden and be willing as a society to make the changes needed. Obviously, people aren't likely to accept a policy if it has a greater impact on particular groups.

It is also essential to think beyond Germany‘s borders and consider how interdependent the European energy market is.

While negotiating these issues, it makes sense to stick to reforms that are strictly necessary and "no regret” activities. For example, improving how bottlenecks in the grid are managed, or cutting the EEG levy, or abolishing the electricity tax.

But without broad social acceptance of the measures, Germany's transition to green energy will be bogged down in trench warfare over ever-more detailed individual measures. That's why the next Bundestag should prioritize creating such widespread agreement.


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